mn soc of cpa's 11 15- 2012 - revised (1)

From Audit to Courtroom: Business Valuation

Tips and Traps For MN Society of CPAs November 15, 2012

By Michael GregoryMichael Gregory Consulting LLC

[email protected]

mailto:[email protected]

© 2012 Michael Gregory Consulting LLC www.mikegreg.com

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Opened Michael Gregory Consulting LLC September 2011

28 years at IRS as engineer valuator, manager, operations team lead, controller, acting assistant director, territory manager

Championed IRS DLOM Job Aid, 6695A Penalty on Appraisers, Sub S, Reasonable Compensation, 409A, Family Limited Partnerships and Lead Initiatives on Other Areas Such As R&E Credit, Transfer Pricing, Cost Segregation and Others

ASA, AVA, MBA and a Qualified Neutral with the Minnesota Supreme Court

November 15, 2012

Michael Gregory


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The opinions presented here are those of Michael Gregory. Michael Gregory does not represent the IRS. Any opinions presented in this seminar are those of the author and do not represent an official position of his current or previous employers. This material is offered for educational purposes only. The author and his employer expressly disclaim any liability, including incidental or consequential damages, arising from the use of this material or any errors or omissions that may be contained in it.

November 15, 2012

Disclaimer


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Understanding The IRS and Issue Resolution Estate and Gift Tax Classification Valuation Issues

◦ Family Limited Partnerships◦ Discounts for Lack of Marketability◦ Reasonable Compensation◦ Common Errors Investigated at the IRS◦ Review with an Opinion of Value at the IRS

Take Away Key Points In Short Time Together - Key Practical Pointers

November 15, 2012

Valuations and Potential Pitfalls


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Eleven Divisions – Need to Understand Stove Pipes and Culture Since 2000

Compliance – Four Divisions Your Primary Interest as Accountants

◦ Large Business and International (LB&I)◦ Small Business and Self Employed (SBSE)◦ Tax Exempt and Governmental Entities (TEGE)

Appeals Counsel – IRS and DOJ Tax Litigation Division

November 15, 2012

Understanding the IRS


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Good Source of Information for ◦ Businesses◦ Starting a Business◦ Operating a Business◦ Closing a Business◦ Employer ID Numbers◦ Small Business Events◦ Industry Professions

“Audit Techniques Guides (ATGs)”◦ Over 50 topics◦ Aerospace to Wine

November 15, 2012

Look at www.irs.gov


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Six Industries (Updated 10-1-2012) CTM, FS, HMP, NRC, RFTH and GHW Case Manager and Team Coordinator Control Specialists Are Consultants and Do NOT

Control Case◦ Engineering IRM 4.4.48 [4.4.48.4 (BV Guidelines)]

in NRC◦ Employment Tax to SBSE◦ Computer Audit Specialists in RFTH◦ Financial Products in FS◦ Economists and International Examiners in “I” of “LB&I”

Counsel

November 15, 2012

Large Business and International Division


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Internal Consultants to All Divisions Four Territory Managers 34 Managers 320 Technical Employees (approx. 180

Credentialed Valuators) Manager Locally in Bloomington – Christine

Harwood Valuators Locally – Real Property and BV

November 15, 2012

Engineering Program – Valuators Reside Here in IRS


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Examination◦ General Program: Team Manager and Revenue

Agent Control ◦ Estate and Gift (E&G) IRM 4.4.425

Classification Process Joint E&G and Valuators E&G Manager and E&G Attorney Control

Collection Counsel

November 15, 2012

Small Business and Self EmployedDivision


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Team Manager and Revenue Agent Control

Business Valuator Issues◦ ESOPs◦ Related for Profit Entities◦ Gifts in Kind◦ Services Provided◦ Reasonable Compensation

Initiatives

November 15, 2012

Tax Exempt and Governmental Entities Division


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Case Closes Out of Examination Unagreed and Goes to the Internal IRS Appeals Division

Goal to Settle Cases Due to Hazards of Litigation

Targets Independent Ex Parte Rules

November 15, 2012

Appeals Division


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IRS Office of Chief Counsel◦ Operations◦ Technical

All Non Litigation Work (Legislative, Regulation, Interpretation)

Corporate International Technical Advice

IRS Division Counsel IRS Special Trial Counsel (DOJ Tax Litigation Division for Refund Cases)

November 15, 2012

IRS Counsel


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Regarding Examination Divisions, Appeals and Council ◦ Who Owns the Case in Exam?◦ Who Manages the Day to Day Operations on the

Case in Exam?◦ What is the Role of the Valuator?◦ Who can Resolve a Case on Examination?◦ Who can Settle a Case in Appeals?

If you have a Frustration on a Case on a Valuation Issue Who Do You Contact?

Let’s Discuss Some Key Issue Areas

November 15, 2012

Quick Review


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◦ Family Limited Partnerships in E&G◦ Discounts for Lack of Marketability◦ Reasonable Compensation◦ Common Errors Investigated at the IRS◦ Review with an Opinion of Value at the IRS

November 15, 2012

Some Key Technical Issue Areas


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Understand the Process◦ Know What It Is You Are Valuing◦ Obtain the Necessary Documents◦ Review and Analyze Agreements◦ Review and Analyze the Financial Data◦ Determine the Appropriate Approach(s)◦ Apply the Appropriate Approach(s)◦ Determine the Appropriate Discounts and

Premiums of What You Are Valuing

November 15, 2012

Family Limited Partnerships


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Business Purpose Contributions Management Prerogatives Distance Limited

Partners from Assets of FLP Distributions Term of Partnership

November 15, 2012

Some of the Key Points in the Agreement – Up To Attorney


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Approval Rights of Limited Partners Required for Major Decisions or Limited Partners Excluded from all Decisions

Right of First Refusal Transferability of Rights Approved by All Limitations on Withdrawal Dissolution Provisions

November 15, 2012

Key Points of Agreement Continued


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Asset Based Approach Income Approach

◦ Discount Rate◦ Cash Flows

Market Approach – Generally Similar to Asset Based Approach in This Instance

Valuation Adjustments◦ Marketable Securities

Closed End Funds from Barron’s, Wall Street Journal, Morningstar, Closedendfunds.com

Choose Appropriate Funds (Bonds, Domestic, etc.)◦ Real Estate

NAV REITS and Closed End Funds Match Funds with Land, Commercial Type, etc.

November 15, 2012

FLP Approaches


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Generally Not Adjusted Could Be Based on Fact Pattern

◦ Example Restriction on Sale to Charity◦ Example Income Only

For Example Reports Go To Partnership Profiles: Real Estate, Marketable Securities, Mixed Assets, Non-income Producing Real Estate

Will Discuss DLOM Separately

November 15, 2012

FLP Adjustments


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DLOM Job Aid for IRS Professionals◦ http://www.irs.gov/pub/irs-utl/dlom.pdf◦ Read It◦ Use Best Practices [33 Factors, IDR, Review, Report

Critiques, Report Language]◦ 18 Approaches Critiqued with Background, Summary,

Strengths, Weaknesses, Important Parameters, Prevalence in the Profession, Court Comments

◦ Make Sure to Note Caveats – Don’t Skip In Addition

◦ Espen Robak – Pluris DLOM◦ John Finnerty – Asian Options Method

November 15, 2012

Discount for Lack of Marketability (Chapter 10)

http://www.irs.gov/pub/irs-utl/dlom.pdf


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Over Compensation Privately Held Companies◦ Compensation Compared with Firm Performance

(RMA, Bizminer, Integra, Fintel, Dun and Bradstreet)◦ Types of Compensation - & Areas◦ Data Sources (Watson Wyatt, ERI, RMA, BVR, RIA,

Troy, Dunn and Bradstreet, Trade Associations and Others)

◦ Independent Analysis◦ Exempt Organizations (GuideStar and ERI)

Subchapter S Under Compensation◦ Avoid Employment and Other Taxes◦ Growing Initiative at IRS

November 15, 2012

Reasonable Compensation (Chapter 8)


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Math Logic Standards SSVS – Know and Follow Documentation – Explain Why Written to Audience

◦ Client◦ Lay Person◦ IRS Exam ◦ New Report For Litigation Tailored to Audience◦ US Tax Court – IRS Attorneys (90% of Fed Tax Cases)◦ Refund Cases – US District Court and US Court of Claims

– Note Judge, Jury, Depositions and DOJ Attorneys

November 15, 2012

Common Errors (Chapter 11)


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Start with the Report and Valuer Certified Valuator Credential and Meet

Standards of Society Engagement Letter and Limiting Conditions Overview of Report Clear and Concise with Logical,

Mathematically Correct Tables and Appendices

Discounts, Discount Rates, Adjustments to Income Statement and Balance Sheet

November 15, 2012

Review with an Opinion of Value at the IRS


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Broad Error Categories◦ Definition of Value - Standards◦ Communication – Written for Audience Clear and Concise◦ General – Val Date, Logical, Control or Minority Valuation,

Comprehensive, Reasonableness of Variables, and Reconciliation

◦ Income Approach – Adjustments, Discount Rate, Cash Flow

◦ Market Approach – Guideline Co’s vs. Transactional Data Bases, Adjustments to the Subject Company

◦ Asset Based Approach – Expertise◦ Reconciliation of Approaches and Method◦ Discounts and Premiums

November 15, 2012

Review with an Opinion of Value at the IRS Continued


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Write a Report for the Court and Judge Read Court Cases by Judge on Topic What Did Judge Halpern Have to Say?

◦ Report is Testimony Have to Work with What I Have◦ Should NOT Have Used WACC in This Instance

Not Going Public and Do Not Meet Assumptions for WACC

Use Equity Approach◦ Do Not Use CAPM or Modified CAPM for the Discount

Rate Same Concerns As Above Use Build Up Method

November 15, 2012

Key Points from the Estate of Gallagher Case TCM 2011-148


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◦ Gross Still Governs – “We Will NOT Impose an Unjustified Fictitious Corporate Tax Rate” – IRS is 6 for 6 in Court

◦ Don’t Assume Judge Understands Valuation Concepts

◦ Understand Discovery Rules and Process and Work with Attorney

◦ Have a Third Party Review Your Report◦ Provide Court with Evidence: If It Is Not In

Evidence It Does Not Exist - Valuation Text Book for Example

November 15, 2012

What Did Judge Halpern Have To Say Continued


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Life In New Venture


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Know Who to Work With at the IRS Raise Issues in Management as Appropriate Issue Resolution – Mediation – Litigation IRS Job Aide on DLOM’s Worth Reading Reasonable Compensation 409A Courts More Analytically Oriented

◦ Avoid Common Errors ◦ Use Facts of Case and Data to Drive Decisions

Appraiser Penalties 6695A – Standards Think Strategically About What You Want to Do

November 15, 2012

Observations


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Know Who Your Working with at the IRS Understand the Role of Participants Seek to Understand Interests –Listen and

Answer What Was Asked Do Not Be Afraid to Ask Questions Consider Options

◦ Ask for a Specialist◦ Ask to Elevate in Management as a Neutral Party

Given Ownership of the Issue by the RA or ETA

November 15, 2012

Issue Resolution Key Points


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http://tinyurl.com/cs4ppyf


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IRS Official and Unofficial Rules of Engagement IRS Organization My History and Best Practices Issue Resolution and Mediation at the IRS Classification in General and Estate and Gift in

Particular Potential Penalties on Appraisers Reasonable Compensation in Corporations Discounts for Lack of Marketability Most Common Errors in Valuations Strategic Growth Areas of Business Valuation Appraisers Other Engineering Issues and Valuation Related Issues Strategic Thinking Overall Commentary and “Do’s and Don’ts”

November 15, 2012

Summary of Chapters (Selected Practical Pointers Here Today of 150 in Book)


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Michael Gregory Consulting, LLC [email protected] www.mikegreg.com 651-633-5311 1945 Sharondale Ave. Roseville, MN 55113

Contact me with any questions or concerns

I Will Stick Around Outside for Questions and to Autograph Book if You Are Interested

November 15, 2012

Contact Information

mailto:[email protected]

http://www.mikegreg.com/


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Thank You Very Much

mn soc of cpa's 11 15- 2012 - revised (1)

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